This article seeks to understand the rationale behind Nigerians investing abroad. We take a look at why Nigerian millennials have lost faith in investing in Nigeria, what currently exists in the investment sector, and why we have partnered with innovators Bamboo, Rise and Chaka - who are creating new investment options. We also shine a light on the market opportunity in the investment sector, the players in the market and the business models they have adopted.
What Is Wrong With Investing In Nigeria?
With Nigeria's large entrepreneurial and innovative population, the country holds the potential to create a thriving investment market. However, the reverse is the case as Nigeria in recent times has been tagged 'Africa's money-losing machine' and here's why:
Stock Market Crashes
While the Nigerian Stock Exchange has crashed 4 times in 12 years, the U.S. stock market has only crashed a total of 4 times since its establishment in 1817. The first-ever U.S. stock market crash was in October 1929 followed by the 1987crash; then the 1999-2000 crash. The fourth and final crash till date was the 'Great Recession' crash in 2008. Compared to these well-known, rare instances of crashes, the frequent NSE crashes seem like business-as-usual.
Public stock trading is a standard venture for professional and private investors globally. However, in Nigeria, the stock market crashes of 2008, 2012, 2015 and 2018 have wrecked the integrity of the Nigerian Stock Exchange (NSE), thereby creating a reluctance in the heart of many Nigerians towards investing.
These stock market crashes have left a significant percentage of young Nigerians wary of investing in the stock market.
Stock Market Trading Is A Class Privilege
A subset of Nigerians who still have faith in the NSE face a different problem; the most valuable assets on the exchange are out of reach to the low-class and middle-class income earners because they are sold beyond their purchasing capacity. Also, the process of trading with the NSE is not favourable for the middle-class, as government requirements and high broker fees that usually require 2.5% of the threshold as payment have created a boundary.
The Declining Value Of The Naira
Nigeria's economy is majorly dependent on the exportation of crude oil. The fall in the price of oil barrels and a decrease in the demand of oil coupled with mismanagement of government funds are the reasons why the Naira keeps decreasing in value. The Naira has lost an average of 12% of its value every year since 1972. This means that N1000 invested last year is already worth less than N1000 this year.
Savings Accounts Are Not Profitable
While one may argue that the typical, standard Nigerian bank savings account is an opportunity to save and invest, the reality contradicts this:
The average savings account in Nigeria returns about 1-4% per annum. With an inflation rate around the upper boundaries of 11%, Nigerians with savings accounts get a real return of about -7% per annum.
Unpredictable Government Policies
The dire poverty situation in Nigeria and lack of sufficient capital to promote needed development should encourage appropriate government policies focused on attracting and encouraging foreign direct investment. Contrary to this, bureaucracy, an unfavourable tax system and disputes with investors often caused by obscurity in the regulatory framework have made investing in Nigeria unattractive. For example, in July 2019, the Lagos State Government proposed a regulation that would demand an annual licensing fee of 25 million Naira ($70,000) per 1,000 bikes used by ride-hailing startups and 30,000 Naira ($83) per bike after the 1,000 initial sets. Additionally, these startups are still expected to pay annual taxes on staff salaries, VAT and other taxes. Following up on the thread of harsh policies, just recently the Lagos State Government placed a complete ban on motorcycles in the most active business areas in Lagos State, causing startups in the motorcycle-hailing space to shut down operations. These startups had raised millions of dollars in investments before the ban.
These harsh policies don't exclude retail investors either. In November 2019, the Central Bank Of Nigeria(CBN) implemented a policy to stop individuals and non-bank financial institutions from the Open Market Operations (OMO) restricting OMO to Deposit Money Banks and Foreign Portfolio Investors. The CBN claims that the high participation rates in OMO were breeding "economic laziness" among Nigerians. This new policy has cut down viable investment options for Nigerians.
Also at the end of 2019, the CBN dropped the interest rates on treasury bills which affects the users of wealth management apps like Cowrywise and Piggyvest. Users of these apps will find it difficult to predict the returns on their fixed savings and investments.
A Path To The Solution
Given all these issues with investing in Nigeria, one may lose hope. However, innovations and possibilities are arising from the use of technology. Technology-supported investments in and out of Nigeria may open up an endless stream of global opportunities for a new generation of investors.
The Solution: Wealth-Tech Innovators In Nigeria
Since it's first wave of 'cashless policy' innovation in the early 2000s, technology in Nigeria has been creating solutions to challenges faced by the finance sector. The adoption of USSD codes and mobile applications by banks have made banking easier for Nigerians. The first wave of fintech companies in Nigeria helped Nigerians digitally move and process money, thereby saving a lot of time and enabling new business models. In 2008, Interswitch became the first online payment platform, paving ways for other online payment solutions like E-Tranzact, Remitta, Flutterwave and Paystack among others. These platforms have made online payments accessible to thousands of businesses. With this fundament created, new innovations, often building on top, are emerging. One of the biggest new moves in the finance space in Nigeria are savings, wealth management and investment.
The First Step: Savings Apps
Wealth management services like Piggybank and Cowrywise launched between 2016 and 2017. They provide a solution to low returns on savings accounts offered by traditional financial institutions.
Piggybank and Cowrywise created apps that allow users to save on their platform, pooling funds to invest in government-backed monetary instruments with a higher ROI than the savings accounts. These apps have also made alternative local investments options in agriculture, transport, real-estate and investment with non-bank financial establishments, available.
PiggyVest and Cowrywise have an estimated total of 500,000 users. The increasing number of users on these platforms is a sign that Nigerian millennials are hungry for savings and investment opportunities that are profitable and not traditional.
While their efforts should be commended, these services will not be sufficient for Nigerians to grow wealth. A majority of investments on these platforms are denominated in the Naira and domiciled in Nigeria, so the flailing economy and inflation still influence investments negatively. This is why, in 2019, Cowrywise introduced a Eurobond mutual fund. Likewise, Piggyvest introduced its dollar-flex feature: an option that allows users to save and get interest in dollars.
The New Entrants: Access To Global Investments
Investing in the global economy cannot be overemphasised. The United States is the world's largest economy, with a GDP of approximately $20.513 trillion. Likewise, China is the second-largest economy in the world, with (GDP) growth averaging 9.5% through 2018. Innovators are looking to give Nigerians access to global financial assets. Three of our portfolio companies(Chaka, Bamboo and Rise) are part of these innovators.
These technology startups are hoping to capture the opportunity in an estimated $100 billion - $250 billion market of investable assets in Nigeria.
Out of the estimated 30-40 million Nigerians with investible income, only 400,000 are investing in mutual funds. It is clear that a sizeable untapped opportunity awaits.
How It Works
Usually, Nigerians interested in investing in mutual funds and global stocks go through legacy financial institutions and brokers.
This is often complicated due to the regulatory requirements, which includes a high minimum threshold, extensive background checks and Know Your Customer processes. What Bamboo, Chaka and Rise do is enable any Nigerian with a bank account access thousands of global and diverse financial assets from their mobile devices with the Naira equivalent of $10.
These startups have adopted an operating model that removes the boundaries that frustrating paperwork, high broker fees and government regulations have created in the past - by simply allowing users to download the app, verify themselves based on the central bank's KYC rules and invest.
Choosing A Weapon: The Contenders
Although these tech startups are working towards the same goal of wealth creation through investments for Nigerians, they all have different business models for achieving this goal.
CHAKA: Chaka's founder Tosin Osibodu describes Chaka as a passport to local and global investing. Chaka has built a technology that allows Nigerians with a bank account to create trading accounts. These accounts give access to purchase global blue chip and local Nigerian stocks. Chaka's roadmap includes not just equities, but other investment products like mutual funds, fixed income products, and eventually, cryptocurrencies.
BAMBOO: With Bamboo, Nigerian users get unrestricted access to over 3,000 stocks listed on the Nigerian and U.S. stock exchanges. This app curates top stocks, exchange-traded funds (ETFs) and American depositary receipts (ADRs) in the United States. The company's target audience is anyone above 18 with at least $20 of investible income. We profiled Bamboo in an earlier piece.
RISE: With the Rise app, users can make Dollar investments in U.S. real estate, stocks, and Eurobonds. The app allows users to create an investment plan, select an asset class and investment duration and fund the plan with as little as $10. Rise also has a free investment club where users can meet other investors and learn more about savings, investments and growing wealth.
Unlike other investment apps, Rise acts as a fund manager, helping its users carefully select assets based on its team expertise. With other investment apps, users have little or no external influence in deciding on what to invest.
Please note: Only Chaka, Bamboo and Rise are portfolio companies in the Future Africa Fund.
TROVE: With Trove, users can explore even more investment options - for example, Cryptocurrencies, and also Stocks & Bonds from both local and global companies. Trove gives users who can't afford to buy shares in their favourite company the opportunity to invest in bits through fractional investing.
The Future Of Wealth Management Innovators: Even More Innovation
Wealth management innovators need to plot their strategies toward long-term survival. This long-term strategy is necessary to give their target market (a young and sophisticated cohort of middle-class to top-of-the-pyramid users with investible capital) time to grow large enough to provide a healthy customer base, as well as constant commercial activity (investing, divesting, trading).
These innovators will also need to carefully consider their business models to reflect efficiency in delivering their unique value propositions. The declining legroom for charging fees on capital market activity will require some of the most significant innovation efforts from players in this industry. These innovations should cover choosing the right position to play in the value chain deploying machine learning and AI, robot advisory, deeper consumer integrations, subscriptions and revenue sharing.
Taking a leaf from the payments industry, there is currently not one silver-bullet approach, which is why the best operators will be the ones that keep things nimble enough to adapt swiftly to the user's needs.
Currently, it is estimated that less than 1% of Nigerian households operate a retail or brokerage investment account. The depth of this participation in the Nigerian capital markets is 2%, according to a 2016 statement by the former Securities and Exchange Commission's Director-General. This is in contrast with 54% of United States households who own stocks, as of 2017.
We have strong convictions that these circumstances present an opportunity that must not be overlooked. For this reason, we have invested in Chaka, Bamboo and Rise to lead these efforts. With the right team, collaboration and go-to-market strategy, these operators will be laying the groundwork for democratizing investment options to over 100 million African households.
